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Anyone familiar with Lending Club as an Investment
Old 04-14-2015, 02:51 PM   #1
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Anyone familiar with Lending Club as an Investment

Hi,

This seems almost to good to be true but I am intrigued. Lots of folks appear to be making 5-10% annually or more. I am surprised I never heard of it.

Lending Club Investor Review - How to Become a Bank

Anyone have any opinions/experience either way.

Thanks,

Wally
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Old 04-14-2015, 03:01 PM   #2
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A few threads out there, if you search.

Peer to peer lending

Lending groups as an investment?

Thoughts on peer to peer lending

P2P Lending

-CC
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Old 04-14-2015, 03:31 PM   #3
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I have money in Lending Club. I am average around 4.5% after write offs for loan defaults. I had what I considered a relatively conservative portfolio of loans. Mostly ABC, no DEF credit ratings.

It seems to go in spurts. Loan defaults happen in groups which severely hurts the performance.
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Old 05-10-2015, 09:45 PM   #4
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Saving in LC for 4 years while my wife continues to work (good for college kids and insurance). At the time of her retirement we will do the math and start monthly distributions from LC so that it is worth zero when we turn 59 1/2. We will do SEPP then as well..

Background: I was "laid off" in corp reorg a few months back and am capable of being FI-REd. Will look for work for until this Fall and if nothing fits then "officially retire".
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Old 05-11-2015, 03:43 PM   #5
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Many of the threads that are being pointed to are old and outdated in many aspects of thinking. What I mean by that is that notes (pieces of loans) do not even have descriptions anymore. It is really done based on the loan details and statistics. There are automation tools to pick loans that match your criteria.
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Old 05-11-2015, 04:31 PM   #6
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Saving in LC for 4 years while my wife continues to work (good for college kids and insurance). At the time of her retirement we will do the math and start monthly distributions from LC so that it is worth zero when we turn 59 1/2. We will do SEPP then as well..

Background: I was "laid off" in corp reorg a few months back and am capable of being FI-REd. Will look for work for until this Fall and if nothing fits then "officially retire".
So you are "investing" the funds you are depending on to help support you until 59.5 in unsecured loans? What could possibly go wrong...
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Old 05-11-2015, 04:45 PM   #7
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So you are "investing" the funds you are depending on to help support you until 59.5 in unsecured loans? What could possibly go wrong...
It is one leg of our retirement stool. I have pretty tight criteria and I am mainly doing A, B, and C notes that are more conservative. This was after hundreds of hours of research in the past 14ish months. LC shows data for loans for several years including 2008-2009.

I mentioned above I'm doing SEPP as well ("We will do SEPP then as well.."). So SEPP/72t to avoid 10% penalty. So 3 different 401k->Rollover Trad IRAs. We also have some ROTH IRA money that can be taken out without penalty if need be (the contributions and not earnings - if 5+ years).

Sound more sound?
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Old 05-11-2015, 05:03 PM   #8
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Sound more sound?
Not really.

If this is a leg on your retirement stool I recommend you sit very gingerly and try not to move around much.
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Old 05-11-2015, 05:14 PM   #9
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Not really. If this is a leg on your retirement stool I recommend you sit very gingerly and try not to move around much.
I have plenty of money in stocks. Bonds, CDs, Ally savings, etc are all paltry and in some cases won't even keep up with inflation in the next several years. In reading old threads some LC proponents repetitively asked about reasonable alternatives and none were given. All the old LC threads discuss picking them by hand instead of using advanced credit models to go with statistical probabilities. Banks make a lot of money on unsecured loans (credit cards) ... defaults just need to be factored in. People die, divorce, lose jobs, etc, etc. Hope that helps explain my perspective additionally.

SEPP/72t are a great thing, IMO. Most friends I talk to never even heard of them!
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Old 05-11-2015, 06:27 PM   #10
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I have about 400 notes in Lending Club. I invest in mostly D&E. My main criteria is loan payment no more than 10-13% of income and prefer home ownership. DTI less than 15% no defaults. I average about 11-12% I have defaults and early pay offs. It took a while to get 400 notes however I think I have enough to average out the BS.

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Old 05-11-2015, 06:40 PM   #11
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I have about 400 notes in Lending Club. I invest in mostly D&E. My main criteria is loan payment no more than 10-13% of income and prefer home ownership. DTI less than 15% no defaults. I average about 11-12% I have defaults and early pay offs. It took a while to get 400 notes however I think I have enough to average out the BS.
JDARNELL
That is great criteria. LendingClub site shows long term most average out to 8%. I originally was doing more D&Es but as I tried to invest more at $25 they were harder to come buy. I've seen some big account examples with a fair number of selective A, B, and Cs in them still getting 8+ %. I'm just trying to be conservative now that I want to use some of this money for longer term vs play money. It also seems that A&Bs don't pay the loan off as quickly as C,D,&Es do but statistically it is not a lot difference. Better to pay off early than default! Just means you have to find more loans (not hard for A, B, Cs) but then you have to wait for the approval process then for the first payment ... thus losing intere$t money.
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Old 05-11-2015, 08:18 PM   #12
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That is great criteria. LendingClub site shows long term most average out to 8%. I originally was doing more D&Es but as I tried to invest more at $25 they were harder to come buy. I've seen some big account examples with a fair number of selective A, B, and Cs in them still getting 8+ %. I'm just trying to be conservative now that I want to use some of this money for longer term vs play money. It also seems that A&Bs don't pay the loan off as quickly as C,D,&Es do but statistically it is not a lot difference. Better to pay off early than default! Just means you have to find more loans (not hard for A, B, Cs) but then you have to wait for the approval process then for the first payment ... thus losing intere$t money.
I have some other minor criteria. The reason I decided on D & E is that I figure A, B, and C borrowers die at the same rate. Really that is what my thoughts are. Sure enough I have had one death. With this criteria you have to get them within 2 min of when they are posted. Now I don't do that all the time so a little cash piles up. My original was a straight 10% max on debt and % of salary. I also looked at amount of revolving credit as a percentage but I have not stuck to this. Were not talking a lot of money here. Less than $10K but it is growing. I could throw more but I have a hard enough time finding time to pick notes now.

IMO I think you could squeeze a little more out if you spent the time. Not interested as there are to many things to do being an ER. 1% extra is not going to make or break me. I have never thought or looked it most A notes go full maturity or paid off early.
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Old 05-11-2015, 08:44 PM   #13
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I have some other minor criteria. The reason I decided on D & E is that I figure A, B, and C borrowers die at the same rate. Really that is what my thoughts are. Sure enough I have had one death. With this criteria you have to get them within 2 min of when they are posted. Now I don't do that all the time so a little cash piles up. My original was a straight 10% max on debt and % of salary. I also looked at amount of revolving credit as a percentage but I have not stuck to this. Were not talking a lot of money here. Less than $10K but it is growing. I could throw more but I have a hard enough time finding time to pick notes now.

IMO I think you could squeeze a little more out if you spent the time. Not interested as there are to many things to do being an ER. 1% extra is not going to make or break me. I have never thought or looked it most A notes go full maturity or paid off early.
2 minutes is pretty fast. Totally follow your logic tho. Need to limit defaults and want solid borrows that should still pay their bills in a modest economic downturn (ie. they don't stretch themselves too thin). It seems you are manually picking notes. I'm doing all automation tools to keep my cash bucket low. Tried to send you a PM about it but I'm too new to send PMs.
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Old 04-21-2016, 12:11 AM   #14
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LC has been a pretty solid and consistent investment for me since I last discussed.

I have a taxable account which is 24 months old and a ROTH account that is 10 months old.

XIRR for the 24 month one is 6.45% and for the 10 month on it is 6.35%.

I buy a lot of notes so I have large diversity. Several 3rd party tools to do this. TurboTax imports the 1099-B now so that part is simple. AvgRate vs LossRate is below.

I reinvest daily payments normally. I am taking out some of the taxable account currently to cover some taxes, summer school payments, and modest vacation (my tools will reinvest while I'm on vacation).

24 month old taxable account:
Code:
Notes	AvgRate	LossRate AvgAge (months)
A	1,692	6.61%	0.30%	7
B	2,214	9.85%	1.10%	9
C	2,032	13.25%	2.60%	9
D	1,396	16.95%	4.80%	10
E	891	20.00%	5.20%	8
F	151	24.26%	3.70%	5
G	75	27.85%	2.70%	3
Summary	8,451	12.45%	2.30%	8
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Old 04-21-2016, 07:20 AM   #15
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LC has been a pretty solid and consistent investment for me since I last discussed.

I have a taxable account which is 24 months old and a ROTH account that is 10 months old.

XIRR for the 24 month one is 6.45% and for the 10 month on it is 6.35%.

I buy a lot of notes so I have large diversity. Several 3rd party tools to do this. TurboTax imports the 1099-B now so that part is simple. AvgRate vs LossRate is below.

I reinvest daily payments normally. I am taking out some of the taxable account currently to cover some taxes, summer school payments, and modest vacation (my tools will reinvest while I'm on vacation).

24 month old taxable account:
Code:
Notes    AvgRate    LossRate AvgAge (months)
A    1,692    6.61%    0.30%    7
B    2,214    9.85%    1.10%    9
C    2,032    13.25%    2.60%    9
D    1,396    16.95%    4.80%    10
E    891    20.00%    5.20%    8
F    151    24.26%    3.70%    5
G    75    27.85%    2.70%    3
Summary    8,451    12.45%    2.30%    8
I agree Lending Club has a reasonable rate of return, although I personally wouldn't bet too much on it. I use Prosper.com but it's only play money ($6K) and I have about 7% as a rate of return for the last 4.5 years. The Vanguard Total Stock Market Index fund beats that return, it has 10.99% over 5 years.
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Old 04-21-2016, 07:42 AM   #16
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I agree Lending Club has a reasonable rate of return, although I personally wouldn't bet too much on it. I use Prosper.com but it's only play money ($6K) and I have about 7% as a rate of return for the last 4.5 years. The Vanguard Total Stock Market Index fund beats that return, it has 10.99% over 5 years.
High rates are not my goal, tho. I'm looking for mix of asset allocations where this more stable and less correlated asset replaces some of my bonds in my asset allocation pie chart.

You can see by my grade allocations that I am purposefully getting the "higher quality" borrowers. As well it keeps my defaults low and about at the magic $3000 number for taxes.

I provided XIRR since that is a more common and accepted what to represent actual returns for various investments. HTH explain.

Corrected headers:
Code:
Grade	Notes	AvgRate	LossRat AvgAge (months)
A	1,692	6.61%	0.30%	7
B	2,214	9.85%	1.10%	9
C	2,032	13.25%	2.60%	9
D	1,396	16.95%	4.80%	10
E	891	20.00%	5.20%	8
F	151	24.26%	3.70%	5
G	75	27.85%	2.70%	3
Summary	8,451	12.45%	2.30%	8
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Old 04-21-2016, 08:22 AM   #17
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High rates are not my goal, tho. I'm looking for mix of asset allocations where this more stable and less correlated asset replaces some of my bonds in my asset allocation pie chart.
I'd put things like loans through Lending Club in the same category as High Yield bonds. And probably junky HY at that.

When the economy turns, default rates will go up just like in HY. I think you'll find the correlation to other U.S. risk assets is pretty high. Although I'm guessing these loans aren't marked to market so they'll give the appearance of stability.

That's not to say these are bad investments. I just think they'll perform a lot like other HY lending.
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Old 04-21-2016, 08:42 AM   #18
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I'd put things like loans through Lending Tree [LendingClub] in the same category as High Yield bonds. And probably junky HY at that.

When the economy turns, default rates will go up just like in HY. I think you'll find the correlation to other U.S. risk assets is pretty high. Although I'm guessing these loans aren't marked to market so they'll give the appearance of stability.

That's not to say these are bad investments. I just think they'll perform a lot like other HY lending.
I'm not saying your wrong and I'm one of the one more conservative LC investors! Credit card companies manage to survive bad times tho Hope the below gives some insight.

I am happy to see as an ongoing basis that in the LendingClub ( http://www.lendingclub.com ) quarterly updates where they are doing a lot of stress testing and being cognizant of it. They know another cycle is coming. They adjust their credit models as well as rates for the different grades.

LendingClub uses Moody's S3 scenario and Fed CCAR 2016 (used by banks to stress test their lending portfolio) to model a worst case economic downturn scenario in Q1 2017 with 8% unemployment.

Moody's S3 scenario: https://www.economy.com/home/product...-Scenarios.pdf
Fed CCAR 2016: FRB: Press Release--Federal Reserve Board releases supervisory scenarios for 2016 Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act stress test exercises and issues instructions to firms participating in CCAR--January 28, 2016
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Old 04-21-2016, 09:06 AM   #19
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Since July 2014, my LC portfolio has returned a solid 9.23% IRR, completely uncorrelated to any other asset class. If you're seeking to devote some assets to an alternative class in order to enhance diversification, this may be for you.

Yes there are defaults and they will reduce your return. The IRR mentioned above includes all defaults and early re-payments.

Yes there is risk and when the economy contracts the returns may get worse. People excuse losing value in real estate, the stock market or bonds, but not in personal notes. LC is not a core holding for me and greatly outperformed S&P500 last year. Will someone please point out the asset class to me which would never lose value?

LC is not available in every state. The website lists the states where they operate.
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Old 04-21-2016, 10:12 AM   #20
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Credit card companies manage to survive bad times tho Hope the below gives some insight.
I'd raise a couple of issues for consideration;

1) You are not lending to these borrowers directly and you don't have a security interest in the underlying loans. What you are doing is lending to Lending Club as an unsecured creditor. LC then agrees to pass along to you the performance of the underlying loans, less their fees.

That means you have two buckets of default risk. First, you're at risk if Lending Club fails. Second, you're at risk for any portfolio defaults. Here's the relevant language from the prospectus:

Quote:
Holders of any Notes do not have a security interest in the assets of Lending Club, the corresponding member loan, the proceeds of that loan or of any underlying assets of the borrower. The Notes will rank effectively junior to the rights of the holders of our existing or future secured indebtedness with respect to the assets securing such indebtedness.

In the event of a bankruptcy or similar proceeding of Lending Club, the relative rights of the holder of a Note as compared to the holders of other unsecured indebtedness of Lending Club are uncertain. If Lending Club were to become subject to a bankruptcy or similar proceeding, the holder of a Note will have an unsecured claim against Lending Club that may or may not be limited in recovery to the corresponding member loan payments.

2) In the event of a LC bankruptcy the status of your investment is highly uncertain. Whether you have a claim against LC's general assets, whether you're restricted to just the related loan assets, whether other creditors can share in those loan assets even if you have no right to other LC assets; what happens if your investment didn't get loaned out, etc are all questions that would be determined by a bankruptcy court.

3) In the event of a LC bankruptcy, institutional creditors to LC with their highly paid legal teams will be working the court system to swing all of the questions raised in point #2 in their favor. Who will argue on your behalf?

4) LC's business model relies on loan origination fees and collecting it's service fee on outstanding loan payments. As the credit cycle turns, both streams of revenue decline. That increases both the risk of an LC default at the same time portfolio defaults are rising making these loans highly pro-cyclical.

5) LC charges collection fees on defaulted loan balances of between 18% and 35%. Typical recovery rates for unsecured consumer loans is less than 35 cents on the dollar (I think), meaning that your recovery on defaulted loans are likely to be closer to zero.

6) Despite the appearance of buying into a diversified portfolio of loans, you're 100% exposed to undiversified Lending Club credit risk

-------

After taking a closer look at Lending Club I'd categorize a loan through their platform as the lesser of an unsecured loan to a small high-tech start up with projected 2016 EBITDA of just $140MM and a 2015 net loss of $5MM or an unsecured portfolio of personal consumer loans.

If LC goes down and the loan portfolio survives you likely lose.
If LC survives and the loan portfolio goes down you lose.
Only if both LC survives and the loan portfolio performs do you win.
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